Posts Tagged ‘concession’

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Negotiation Tactic: The Reverse Auction

Thursday, January 15th, 2009
The Reverse Auction Negotiation Technique Is A Powerful Tool For Buyers

The Reverse Auction Negotiation Technique Is A Powerful Tool For Buyers

In the world of negotiations, there are few tactics as old and as well thought of as the “reverse auction”. This is a powerful negotiating technique that allows a buyer to get the sellers to offer their best pricing for the most amount of work. Not bad if you are a buyer, eh?

Here’s how a reverse action works for you if you are a buyer: let’s pretend that you wanted to build a house. You go out and get three different offers from three different home builders. As you can imagine, when you get the bids they will contain a confusing mix of different options and time frames.

Your next step will be to call a “reverse auction”. You invite all three builders to meet with you. You have them show up early and have them wait in the same room before they meet with you. After they’ve had a chance to sit and glare at each other for a bit, you then call them in to meet with you one by one.

Each builder will then proceed to tell you why they are the best and why you should avoid selecting the other builders. After you’ve had a chance to talk with all three builders, you now understand the subtleties and the risks that are involved in building the house that you want.

With all of this new information, you are now able to more clearly refine your specifications because the alternatives have become clear. You can now provide the builders with an updated proposal that they can bid on.

You will end up selecting the builder who can provide the best price while providing the most house for that price. By using a reverse auction, you were able to learn a great deal about building a house and you were able to trade off options that you originally did not know existed.

Why does a reverse auction work for a seller? Simple, there are four reasons:

  1. Competition Works: when you allow sellers who are competing against each other to “see” each other, it increases the level of competition.
  2. Apply Pressure To Management: the reverse auction technique allows you to move beyond the salesperson that you are dealing with and actually put pressure on the company’s management.
  3. Almost There Syndrome: each of the sellers has already put a lot of time and effort into responding to your original proposal. This means that they all think that with just a little more effort they can close the deal.
  4. It’s Concession Time: you know that sellers are more adverse to losing a deal during negotiations than earlier in a deal. This means that they may make concessions that they normally would not.

This negotiating technique is not without its downside. You need to keep in mind that whichever seller you select is going to feel as though they were put through the ringer. They will probably resent the auction process and will want to make up for being forced to bid a low price.

What this means to you is that any changes that you want to make to the contact after it has been signed will probably end up costing you dearly. Additionally, the seller may end up delivering the product to you late and may even shave some corners on the quality of what gets delivered.

Have you ever had a chance to use a reverse auction during a negotiation? Was it successful? Were you happy with what was delivered in the end? Have you ever had to compete in a reverse auction process? Did you win? How did you feel if you did win? Leave me a comment and let me know what you are thinking.

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Boeing Strike Is Over: Did Negotiation Save The Day?

Thursday, November 6th, 2008
The Strike Is Over At Boeing, But Who Got What?

The Strike Is Over At Boeing, But Who Got What?

Just in case you had not heard, the Association of Machinists and Aerospace Workers has settled its strike with Boeing. The machinists had been off the job and on the picket lines for 52 days – a very long time for a Boeing strike. Both sides are calling the agreement that they came to as being a “fair compromise”. But was it? Let’s take a closer look at how things worked out from a negotiating point-of-view and see what we think happened…

One of the key components of the negotiated agreement is that this contract will cover 4 years unlike previous contracts which have covered only 3 years. This was very important to Boeing because in three years they will just be reaching the peak of production for their new 787 jet and the possibility of having another cripling strike occur then could damage the company’s bottom line as well as their reputation.

The machinists union is actually fairly small – only 27,000 workers. However, they were negotiating from a position of strength. Boeing currently has 3,725 orders for new airplanes that need to be filled. It was rumored that the strike was costing Boeing $100M a day. The machinists were also helped by the fact that the type of work that they perform is highly specialized and not easily replaced. The work done by the machinists has a direct bearing on the final safety of the finished product and this is something that Boeing needs to make sure never gets compromised.

Boeing had bigger issues to consider during their negotiations with the machinists. Boeing is getting ready to face another contract renegotiation with the 21,000 strong Society of Professional Engineering Employees in Aerospace (SPEEA). This contract expires on December 1st so Boeing really needed to get the machinist strike wrapped up before they potentially had another strike on their hands. This also meant that Boeing could not just cave in to the machinists because then the SPEEA would be expecting the same.

Boeing has some other issues that had to be weighing on their decision making team. They were already going to have problems meeting their goal of delivering the first 787 Dreamliner planes in 2009. The lead time for getting a new plane design approved to be sold is quite lengthy. After Boeing has been able to assemble several of the first 787 planes, they will then need to start almost a year of around-the-clock flight testing.

So who walked away with what in the final contract?

It sure looks like the machinists got what they wanted. Specifically, Boeing agreed to limit its use of contractors doing work that machinists had previously done. Contractors will still be able to deliver parts to the production lines; however, the machinists will be in charge of tracking and distributing those parts once they enter the factory. I believe that this was the key point of the negotiations – if Boeing had been able to expand the role of contractors, then they would have been able to use fewer machinists. However, it looks like in order to end the strike quickly, Boeing backed away from this demand.

What’s a negotiator to learn from all of this? Your negotiating power is not always obvious. The machinists were in a powerful situation and they knew it. They used this as leverage to prevent Boeing from reducing their importance and ensured that the next time they enter into a negotiation, they will be well positioned to get what they want.

Who do you think came out ahead in this negotiation? Do you think that Boeing erred in settling the strike without getting the ability to use more contractors? Do you think that the machinists should have held out to remove contractors from delivering parts to the production line? Leave a comment and let me know what you are thinking.

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It’s Negotiation Time At Boeing: Plane & Simple

Wednesday, October 29th, 2008
Boeing And Its Union Can't Seem To Agree On One Key Issue

Boeing And Its Union Can

Even as the rest of the world is going through a financial melt-down, out in Seattle there is still strike going on at Boeing that is costing the company roughly $100M in missed revenue per day. Ouch! Just in case you have not been following this story, the 27,000 members of the International Associaition of Machinists and Aerospace Workers who work for Boeing are out on strike and have been so for since September 6th. Doesn’t this seem like just the kind of problem that a good negotiator could step in and solve?

Currently, both sides are feeling the pain from the strike. On this past Wednesday Boeing had to announce to the press that their 3rd quarter net income sank by 38% due to the strike. Now you’ve got to remember that Boeing is sitting on a stack of orders for their planes right now: they have a backlog of orders for 3,725 planes of which about 900 are for the eagerly anticipated new 787 Dreamliner. Keep in mind that a new airplane costs roughly about $100M to buy and you start to understand that if only Boeing could build new airplanes, then they would be making money hand over fist.

The union folks are also hurting. On average the union workers bring home about $65,000 / year. While the strike is on, they are getting $150 / week from the union in strike pay. This means that everyone is scrambling to pick up part-time jobs in order to stem the bleeding.

The main players in this negotiating drama are well known. On the union side they have Mark Blondin who is a former Boeing machinist who is serving as the lead negotiator for the union. On Boeing’s side, Doug Kight who is Boeing’s lead negotiator. Kight is also Boeing’s vice president of human resources, a position that he took over in late 2006. During previous negotiations, Kight provided legal counsel to his predecessor, Jerry Calhoun, who was formerly Boeing’s lead negotiator.

When we talk about negotiating deals, we often focus on price. However, in this case the price issue is well hidden by another issue: job security. At the heart of the debate is a single question: can Boeing expand the types of jobs that outside contractors perform in assembling airplanes. From Boeing’s point-of-view they are trying to cut costs and reduce the time required to build a plane. In order to do this they are outsourcing jobs to other firms. As a result of the last contract that was negotiated between these two parties, outside firms are now allowed to deliver parts directly to the assembly line. The union is concerned that their members are going to lose their jobs to outside firms if this trend continues. Boeing says that they need to retain flexibility and are unwilling to make any job guarantees. Can you say deadlock?

What can be done to resolve this issue? Remember, the ultimate goal is to make sure that both sides of the table leave the negotiations with a feeling of satisfaction. Additionally, both sides need to give something up in order to feel that they’ve “earned” a negotiated settlement. There are lots of ways that this issue can be resolved. Here’s one that would work for both sides.

I’m sure that there are a lot of other issues on the table like health care, pension benefits, etc. Let’s assume that the core negotiating concept of expanding the discussion has been done and that this issue of job security is really, really a key sticking point. If you focus for a moment on the end game, Boeing really wants to start making planes again so that they can keep their customers and make lots of money. The union members really want to start making planes again because they miss their paychecks and they are proud of their work. This is great news – both sides want the same final goal. Now the trick is to see what can be done in order to get them there.

One thing that makes solving this issue just a bit easier is that Boeing is sitting on a pile of money. Boeing has two issues with the union: the immediate issue of job security for 27,000 workers as well as the long term life of the union itself (will a union be needed in the future?). Both needs have to be met. The union has two issues with Boeing: Boeing wants to lower it’s production costs by using less expensive outsourced labor and Boeing is getting tired of having to deal with a strike and work stoppage every three years. The strikes are playing havoc with Boeing’s ability to compete with Airbus because Boeing can’t honor its contracts to its customers.

So here’s one possible solution. Boeing has 27,000 current employees who basically (just like all of us) only really care about their jobs. What Boeing should agree to is that they will keep these employees working until such time as they no longer need them. At that point in time, Boeing will pay them off to go away. Specifically, Boeing will pay them 1/2 their current salary though retirement age. This will free the worker up to go get retrained and get another job if they want to. Potentially they could earn a great deal of money for the rest of their career. Oh, and they could pretty much pick any job that would make them happy because they would still be getting paid by Boeing. This would cost Boeing some serious cash. If they terminated all 27,000 workers who were making $65,000 / year and everyone was 30 years old, then Boeing would have to pay out $30B over the next 35 years. Now that sounds like a lot of money, but it turns out that it really isn’t. Remember we’re really talking about a long-term solution here. Boeing is going to be paying a lot in salary no matter what. Having the flexibility to further streamline their production process while potentially paying half of that would save the company a lot of money.

Now from the union’s position, they are going to have to change how they operate in the future. Clearly the number of machinists needed by Boeing has been and will continue to decrease over time. However, it can be argued that the remaining machinists will become even more important to the company – they will be doing things that no outsourcing firm can do. The role of the union is going to have to evolve and change. Specifically, over time the machinist union will need to merge with another union in order to maintain it’s bargaining strength. Realizing this earlier than later will be the key to resolving the current issues.

What would your next step be if you were the lead negotiator for Boeing? What would your next steps be if you were the lead negotiator for the union? Who do you think is feeling the most pain right now? Leave a comment and let me know what you are thinking.

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